Food deflation persists in UK despite rises elsewhere

By Rick Pendrous

- Last updated on GMT

 Falling vegetables prices were a leading cause of deflation
Falling vegetables prices were a leading cause of deflation

Related tags Inflation Consumer price index

Food deflation remains a persistent feature of the UK economy, despite the latest figures from the Office for National Statistics (ONS) showing headline inflation up 0.5% in March.

The main cause of downward year-on-year food and non-alcoholic beverage prices in March was mainly driven by vegetables in the former category, although deflation was witnessed almost across the board.

The ONS figures showed the 12-month UK Consumer Price Index (CPI) pushed forward at a little higher rate than has been the case in recent times, with March showing a 20 basis point (bps) increase month-on-month (mom).

Shore Capital analysts Clive Black and Darren Shirley attributed the upward momentum to higher transport prices, which increased 1.7% mom, driven by air transport with fares rising nearly 23% between February and March.

Motor fuel prices were lower year-on-year (yoy), although mom pump prices are starting to rise, which Black and Shirley argued would filter into CPI in due course.

Food deflation deepens to 3.0%

Against a base of 2.4% in the year to February, UK CPI food deflation deepened by 60bps in March (3.0%) with prices falling in all categories bar fruit, which bucked the prevailing trend with 1.9% inflation. The deepest deflation yoy was recorded in oils and fats (-7.3%) and fish (-5.4%).

Non-alcoholic deflation eased to 0.8%, a 20bps improvement on the 1.0% reported in February with alcoholic beverage deflation deepening by 60bps to 3.8%; 4.5% for spirits and 3.0% for beer.

Consumer confidence in the UK seems to be easing, reflecting a variety of factors we sense, from uncertainty surrounding the forthcoming EU referendum to concerns about security and international terrorism,”​ remarked Black and Shirley. “The UK’s poor ongoing weather also does little to raise the mood of the average Briton.”

Such factors, alongside intense competition between the high street grocers, are likely to restrain retail price rises in the near term, they predicted. However, they suggested a number of factors could yet lead to inflation emerging more robustly into the UK, evidenced by the step forward in March CPI.

“Should sterling weaken then clearly there is scope to import price rises, noting a near record trade deficit in goods in Q4​ [further quarter of] 2015. Additionally, we are starting to see crude oil prices rise from their recent lows​. Both of the latter may feed into motor travel prices and manufacturing costs in time,” ​they said.

Apprentice Levy and National Living Wage

On top of all this, people heavy sectors – notably the food supply chain – are facing a rise in operating costs due to the amalgam of the Apprentice Levy and the National Living Wage, they added.

Black and Shirley expected food prices to level off in 2016 and for inflation to more likely be a feature of the first half of 2017.

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